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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: RR who wrote (45470)	12/20/2001 4:07:49 PM
From: stockman_scott	Respond to of 65232

THURS/DEC 20 - BRIEFING ON THE ECONOMY The Economy : The financial markets often signal business cycle turns before the economic data do. That may have been the case again this year. The stock market has been heading higher and the yield curve has been steepening for a few months now, and the economic data are beginning to confirm the market's optimism. The last two weeks of jobless claims data have indicated that layoffs may be ebbing, consumer spending has held up relatively well, and today's Philly Fed index indicates that even the manufacturing sector may be hitting bottom. The lesson learned is that even post-9/11, monetary and fiscal stimulus still matter. Aggressive Fed easing all year and fiscal stimulus undertaken earlier this year and then again after the 9/11 attacks are having an effect. Furthermore, it's important to remember that the unemployment rate is still very low relative to past cycles, and if layoffs are already easing, consumers should be expected to become more optimistic in early 2002. That's a fairly rosy view of the economy, and one which has certainly been supported by the markets. Now for the bad news. Even though the economy will most likely emerge from recession in early 2002, the pace of growth is likely to be frustratingly sluggish. Recall that in the last business cycle, the recession ended in early 1991, but conventional wisdom held that we remained in recession. The sluggish recovery in the early 1990s was due primarily to the fallout from the Savings & Loan crisis and the associated lack of supply of capital. The next recovery might be similarly sluggish but for a completely different reason: lack of demand for capital as business investment remains soft. Even with a rebound in consumer demand, there will still be plenty of excess capacity due to the 1999/2000 investment bubble. Just take a look at a chart of capacity utilization and you'll get the picture. The economy can grow even if investment does not, but it will not grow at a rapid clip. Back in 1992-93, the economy grew at just shy of a 3% clip and Bush was voted out because it was the economy, stupid. You can imagine how satisfied the market and the American public will be if growth inches along at a 1-2% clip. In short, it's possible that the market's optimism about an end to the recession is justified, but it's also possible that this will soon turn to pessimism when the growth rate is frustratingly slow. - Greg Jones, Briefing.com